2007 / 2008 Annual Report - Eastern Cape Development Corporation

EASTERN CAPE DEVELOPMENT CORPORATION 2007/08NOTES TO THECONSOLIDATED ANNUAL FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 MARCH 200834 Financial risk managementOverviewA comprehensive Investment Policy is used to ensure that all the market risks to which the group is exposed areunderstood and managed. Governance structures are in place to achieve effective independent monitoring andmanagement of market risks through:• The Board and Audit Committee, which is responsible for the overall risk management oversight of the Group.• The Executive Management Committee through setting up subcommittees to deal with specific financial risks.• The Development Investment Committee, which is responsible for ensuring that the impact of risks in the loan andequity investments is being effectively managed and reported and that all policy, risk limits and relevant market riskissues are reported to the Group’s Board and Audit committee.• The Investment Committee which is responsible for managing risk associated with the investment of cash and cashequivalents.ObjectivesThe group market risks are managed by the Board and Audit Committee through a number of executive managementcommittees. These risks include fair value interest rate risk, currency risk, credit risk, liquidity risk and cash flow interestrate risk.The Group seeks to minimize the effects of the negative impact of these risks by ensuring compliance with Boardapproved policies and benchmarks with regard to the following:• Proposed money market investment strategies do not result in the breach of asset/liability mismatch gap limit.• Ensuring that the net interest income volatility is within approved benchmark• Adequate overnight liquidity limit is complied with by having sufficient call balances• Credit risk is controlled by entering into money market transactions with high quality counterparty financialinstitutions.• Instrument limits are set to avoid excess concentration in any given financial investment instrument.Overall the Group’s main financial risk management objective is to ensure enhanced return within very conservative riskprofiles or parameters approved by the board.Capital managementThe Group manages its capital to ensure that entities in the Group will be able to continue as a going concern whilemaximising the return to stakeholders through the optimisation of capital levels. The Group’s overall strategy remainsunchanged from 2007.The capital structure of the Group consists of cash and cash equivalents, disclosed in note 11, and equity attributable toequity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in notes 12 and 13,respectively. The Group is not subject to externally imposed capital requirements and does not routinely make use ofborrowings.Risk exposure arising from financial instrumentsLiquidity riskThe Group is exposed to liquidity risk through its operational and banking activities. Liquidity risk is measured in termsof a Board approved Investment Policy with appropriate dashboard liquidity risk measures on the basis of which the riskis managed by the Finance function.Interest rate riskThe Group’s exposure to interest rate risk arises from primarily the following:• Investment in development loans.• Investment of surplus operational cash.The interest rate risk is managed in terms of the Board approved investment and development investment policies. TheGroup monitors and ensures that the interest rate risk profiles are in line with limits and benchmarks stipulated in thepolicy.100